Can you survive the 5 tectonic shifts to the business landscape?


Can you survive the 5 tectonic shifts to the business landscape?

In his book "The Upside of Down," Thomas Homer-Dixon presents a theory of the crisis and renewal of societies.

The Canadian author and complexity expert of the Balsillie School of International Affairs describes how five tectonic shifts could lead to synchronous failure in our systems. Without knowing how or when breakdown may occur, cities and companies need to mitigate risks, foster resilience and seize opportunities.

In this Q&A, Homer-Dixon gives us his take on the upside of down.

Anna Clark: In your book, you lay out five "tectonic" stresses that are accumulating underneath the surface of our societies: population, energy, environmental, climate and economic stresses. You also point out how the rising speed of global connectivity and the escalating power of small groups to destroy things and people can multiply the effects. How can your concept of resilience help us prepare for changes that are unpredictable, yet inevitable?

Thomas Homer-Dixon: There are two prevailing notions of resilience. I call the first "engineering resilience," which defines resilience in terms of bouncing back to the status quo. A community, for example, is hit by a natural disaster or some other shock and if it's resilient, it bounces back to its prior state. I use "ecological resilience" to refer to a system's capacity to adapt to a rapidly changing environment. Ecological resilience involves deep change and continuous innovation through creative destruction. Both types of resilience are useful.

AC: You're here giving a keynote for The Dallas Institute of Humanities and Culture's conference, "What Makes a Resilient City?" I'm curious to know how you would extrapolate your concept of resilience from cities to companies?

THD: It is really important not to put all of one's eggs in one basket. Our world can change dramatically in a short period of time. Most adaptive systems have built-in diversity so that if one strategy doesn't work they can shift. In business, you may be lucky if you make single bets on one area, but diversity of investments and products is critically important for resilience. In terms of innovation and internal operations, we're learning that relatively flat hierarchies are more adaptive and provide greater creative output. Take a look at how 3M has institutionalized creativity. Companies need to institutionalize failure in order to give their people freedom to innovate in the face of change.

AC: What are some opportunities entrepreneurs and businesses can exploit that could be profitable while also helping to reform systems? In other words, what is the upside of down in a business context?

THD: I think we're entering a historical period that is a general purpose technology transition. Such revolutionary change occurred with the internal combustion engine and personal computer revolution, for example. We're going to see the same phenomenon in the coming decades, but this time it won't be a single technology. It will be a suite of technologies (think stabilization wedges from the Carbon Mitigation Intiative).

AC: Your book was released in 2006. Since its publication, we've seen the fracking revolution make more oil and gas available and cheaper in North America. Does the fracking phenomenon significantly change your long-term evaluation of oil and gas supply?

THD: The return on energy invested (EROI) is how much work you have to do to access energy. The concept of EROI analysis, pioneered by Charles Hall at SUNY College of Environmental Science and Forestry, looks at the energy you must expend to get your energy. The shale boom has not changed the trend toward declining EROI. Energetically, shale and shale gas are very expensive, and there are lots of caveats with these. The main ones relate to the time horizon of the resource flow. Also, capital requirements for continuous drilling are enormous. Once you get outside sweet spot, the part of field that yields highest returns, the returns decline dramatically, as geoscientist David Hughes also points out.
Some of the natural gas scenarios we have now are totally unrealistic. There are enormous, very powerful interests that want to portray this as a long-term game changer. The real challenge lies in maintaining capital flow, because companies pay extraordinarily high prices to drill but now natural gas prices have collapsed. When you dig into the data, we don't know yet if residual production will justify maintaining the well. It all depends on the length of the tail.

If I had to make an educated guess, I would say we've got six to 10 years and it's all going to collapse. Natural gas can serve as a bridge fuel, but it won't change the overall energy challenge that humankind faces.

AC: Boosters of the Keystone XL pipeline tout the prospect of North American energy independence as one of its advantages. What's wrong with that argument?

THD: Well, it's not clear where the oil will go once it gets to the Gulf and is refined. Going into the international marketplace and increasing global supply doesn't necessarily improve American energy independence. The broader issue for me is that we're doubling down on carbon-intensive resources, or junk energy. The EROI for fracking in the sweet spot is 13:1, but outside of the sweet spot, the EROI is less than 1:1. Why move to carbon-intensive sources with low return on investment at the time we have a clearly emerging global climate change problem?

We need to move to a global zero-carbon scenario and get out of this business with the least economic repercussions possible. In Canada, tar sands need to be wound down. By transitioning to alternative vehicles and biofuels, the U.S. could move to a substantially renewable transportation system by 2030 and be mostly there by 2050.

To get to zero-carbon energy, Harvard professor of environmental science Dan Shrag suggests we use natural gas to kill coal. Using natural gas as a transitional fuel within the context of an economic and political strategy undercuts coal, so environmentally, investing in more and better ways to use natural gas is good. Then, when natural gas winds down, we're left with renewables. There's an enormous need for investment in R&D. We need energy breakthroughs. We need advances with deep geo-thermal. ARPA-E, for example, is really impressive. It is Steven Chu's most significant contribution.

AC: In your recent NYT op-ed, you say, "Canada is beginning to exhibit the economic and political characteristics of a petro-state. Countries with huge reserves of valuable natural resources often suffer from economic imbalances and boom-bust cycles. They also tend to have low-innovation economies, because lucrative resource extraction makes them fat and happy." You also say that the cabinet and the Conservative parliamentary caucus are heavily populated by politicians that deny mainstream climate science. This sounds a lot like America, so maybe denial isn't a country problem so much as a human problem. Do you have faith in humanity to overcome our individualistic nature to make policy for the collective good?

THD: Uncertainty becomes a fig leaf you can hide behind, but we can already see signals, such as persistent drought affecting our food supply. Imagine a major global food crisis in 2030. We need to reframe the problem and go back to the essential question, "What sort of future do we want for our kids?"

AC: I think about all the innovators and entrepreneurs I've met since moving into this field in 2005. A few have made it, some keep hanging on, but many of them are gone. It can be discouraging to see the fallout of people whose solutions to these problems could not be commercialized. Do you have any final words of inspiration for green-minded entrepreneurial and business people?

THD: There is untold opportunity in emerging economic ecology. Whether you are an artist or an accountant, you should remain open to experimentation. Like ecology, this process involves constant speciation. The failures teach you as much as the successes. It's messy, but that is how organisms live and grow. And the same will be true of our businesses and societies. There is little certainty on the road to innovation, but you should just keep pushing.